1. Accounting for Bad Debts
Chapter 12
Accounting for Bad Debts
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

2. Learning Objective 1
Describing how the Bad Debts Expense account and the Allowance for Doubtful Accounts account are used to record bad debts
LO-1
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

3. Bad Debts
Debts that come from credit customers who do not pay their bills
Affects a company’s credit policy
Cannot grant credit to just any company
LO-1
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

4. Bad Debts
On December 1, 2008, Corey Co. sold merchandise on account for $5,000. On July 1, 2009, Corey Co. determines that the $5,000 will never be collected.
2008
2009
Dec 1
Sales of
$5,000
recorded
Dec 31
End of
fiscal
year
Jul 1
Debt
determined
to be bad
LO-1
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

5. Bad Debts
Bad debts expense should be recognized in the accounting period in which the sales were made.
2008
2009
Dec 1
Sales of
$5,000
recorded
Dec 31
End of
fiscal
year
Jul 1
Debt
determined
to be bad
LO-1
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

6. Bad Debts
Solution: Estimate how many of the current sales will be uncollectible
Prepare an
adjusting entry
2008
2009
Dec 1
Sales of
$5,000
recorded
Dec 31
End of
fiscal
year
Jul 1
Debt
determined
to be bad
LO-1
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

7. Allowance for Doubtful Accounts
Is a contra-asset account
Is subtracted from accounts receivable
Accumulates expected amount of uncollectibles as of a given date
Contra account. An account with a balance that is the opposite of the normal balance. For example, Accumulated Depreciation is a contra asset account, because its credit balance is contra to the debit balance for an asset account.
LO-1
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

8. Adjusting Entry for Bad Debts
General Journal
Page 8
Date
Account Titles and Description PR
Dr.
Cr.
Dec Bad Debts Expense XXXX
Allowance for
Doubtful Accounts XXXX
Contra-Asset
Account
LO-1
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

9. Balance Sheet Presentation
Corbin Company
Partial Balance Sheet
December 31, 200X
Net Realizable Value
Gross Amount
Estimated to be
Uncollectible
Current Assets:
Cash $ 10,400
Accounts receivable $100,000
Less: Allowance for
doubtful accounts , ,000
Merchandise inventory ,000
Total current assets $404,400
Total Current Assets
LO-1
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

10. Net Realizable Value
The amount of Accounts Receivable that is expected to be collected
Calculated by subtracting Allowance for Doubtful Accounts from Accounts Receivable
LO-1
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

11. Account Titles and Description
Writing off an account
General Journal
Page 8
Date
Account Titles and Description PR
Dr.
Cr.
Jul Allowance for Doubtful Accounts ,000
Accounts Receivable-Discello ,000
LO-1
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

12. Learning Objective 2
Using the income statement approach and the balance sheet approach to estimate the amount of Bad Debts Expense
LO-2
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

13. How is this amount determined?
Estimating the Amount
General Journal
Page 8
Date
Account Titles and Description PR
Dr.
Cr.
Dec 31 Bad Debts Expense XXXX
Allowance for Doubtful Accounts XXXX
How is this amount determined?
LO-2
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

14. Income Statement Approach
Bad Debts Expense = Percentage of net credit sales
Focus is on measuring the expense, which is reported on Income Statement.
Matching requirement- ignores previous balance of Allowance for Doubtful Accounts when estimating Bad Debts Expense for current period.
LO-2
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater 7

15. Exercise
Compute Net Sales: Sales $110,000 Sales Returns & Allowances (500) Sales Discounts (9,500) Net Sales $100,000

16. Exercise
LO-2

17. Account Titles and Description
Exercise 13-2
General Journal
Page 8
Date
Account Titles and Description PR
Dr.
Cr.
Dec Bad Debts Expense ,000
Allowance for Doubtful Accounts 4,000
LO-2
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

18. Exercise Any existing balance in the Allowance account is ignored.
Accounts Receivable
Bal. 30,000
Allowance for
Doubtful Accounts
5,000
4,000 Adj.
$9,000 Bal.
LO-2
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

19. Balance Sheet Approach
Adjusting entries are based on bringing the Allowance account to a required amount.
Method is based on the Accounts Receivable amount and the aging process.
LO-2
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater 7

20. Balance Sheet Approach
Net realizable value - The amount (accounts receivable – Allowance for doubtful accounts) that is expected to be collected.
Focus is on determining the net realizable value of Accounts Receivable, which is reported on Balance Sheet
LO-2
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21. Learning Objective 3 Preparing an Aging of Accounts Receivable LO-3
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

22. Example
Mayfair Co. has the following balances in its accounts at the end of 2008
Accounts Receivable
Bal. 30,000
Allowance for
Doubtful Accounts
500
LO-3
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

23. The following aging schedule is prepared for the end of the year
The following aging schedule is prepared for the end of the year. Complete the schedule.
LO-3
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

24. Example Accounts Receivable Bal. 30,000 Allowance for
Doubtful Accounts
500
2,179
Desired balance 2,679
LO-3
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

25. What if the Allowance account had a debit balance of $500 before adjustment?
Accounts Receivable
Bal. 30,000
Allowance for
Doubtful Accounts
500
3,179
Desired balance 2,679
LO-3
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

26. Learning Objective 4
Writing off an account using the Allowance for Doubtful Accounts method
LO-4

27. Allowance for Doubtful Accounts
When a company deems an account uncollectible, it is written off and no longer considers it an asset.
When the journal entry is made, allowance for doubtful accounts and accounts receivable are reduced.
Example: J. Monaco’s account balance of $500 is deemed uncollectible on June 1, 20X8.
General Journal
Page 8
Date
Account Titles and Description PR
Dr.
Cr.
20X8
Jun 1
Allowance for Doubtful Accounts
500
Accounts Receivable, J. Monaco
LO-4
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

28. Recording Recovered Debts using Allowance for Doubtful Accounts
Example: Assume J. Monaco paid half of his account balance of $500 on January 3, 20X9.
General Journal
Page 8
Date
Account Titles and Description PR
Dr.
Cr.
20X9
Jan 3
Accounts Receivable, J. Monaco
250
Allowance for Doubtful Accounts
Restores collectible portion
Cash
Records payment received
LO-4
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

29. Exercise
Writing off an account using the Allowance for Doubtful Accounts account
LO-2, 4
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

30. Exercise Accts. Rec., Angie Ring Accts. Rec., Mike Catuc LO-2, 4
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

31. Exercise Accts. Rec., Mike Catuc Accts. Rec., Mike Catuc LO-2, 4
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

32. Learning Objective 5 Using the direct write-off method LO-5
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

33. Direct Write-Off Method
Used when a company cannot reasonably estimate bad debt expense
Uncollectible accounts are directly written off to current year’s bad debt expense
The year sale was made does not matter
Allowance for doubtful accounts is not used
LO-5
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

34. Direct Write-Off Method
Example: T. DeStadio’s account balance of $400 is deemed to be uncollectible on May 15, 20X7.
General Journal
Page 8
Date
Account Titles and Description PR
Dr.
Cr.
20X7
May 15
Bad Debts Expense
400
Accounts Receivable, T DeStadio
Wrote off account
LO-5
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

35. Direct Write-Off Method
Recording Recovered Debts in same year
Assume T. DeStadio paid $200 of his balance July 3, 20X7.
Reverse the entry made prior by $200
General Journal
Page 8
Date
Account Titles and Description PR
Dr.
Cr.
20X7
July 3
Accounts Receivable, T DeStadio
200
Bad Debts Expense
LO-5
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

36. Direct Write-Off Method
Recording Recovered Debts in different year
A new account- Bad Debts Recovered is used
Assume T. DeStadio paid $200 of his balance on July 3, 20X8.
General Journal
Page 8
Date
Account Titles and Description PR
Dr.
Cr.
20X8
July 3
Accounts Receivable, T DeStadio
200
Bad Debts Recovered
Restores collectible portion
Cash
Records payment received
LO-5
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

37. Exercise Accts. Rec., Angie Ring Accts. Rec., Mike Catuc LO-5
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

38. Exercise Accts. Rec., Mike Catuc Accts. Rec., Mike Catuc LO-5
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

39. End of Chapter 12
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater